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May 29, 2009

London Gold Market Report
by Adrian Ash

09:10 EST, Fri 29 May

Gold Jumps to 13-Week High But Only in Dollars as Finance Markets Surge

THE SPOT PRICE of wholesale gold jumped for the second day running on Friday - but only in Dollars - reaching its best London Gold Fix since Feb. 26th at $972 an ounce.

New data showed the US economy shrinking at an annualized 5.7% pace during the first quarter of 2009, while domestic prices rose 2.8% from a year earlier.

That pegged the Federal Reserve's key interest rate more than 2.5% below zero in real terms.

"A combination of a weaker Dollar and rising inflation expectations would represent the perfect storm for gold," says John Reade, chief commodities analyst at UBS in London.

"[Gold's] break of 966 should move focus to the previous major high 1006," says Scotia Mocatta's daily update.

"Physical selling has declined, providing very little resistance to the move higher," reports Walter de Wet at Standard Bank. "We expected gold scrap selling to intensify above $950."

Analysis from London dealers Mitsui puts global scrap gold supplies near 1,000 tonnes for the first quarter of this year - equal to 40% of annual world Gold Mining supply.

But "So much scrap entered the market in the recent past that there is not going to be as much available in the next gold rally," says one respondent to its latest Refining Monitor.

Friday's new 3-month high in Gold only came for US investors, meantime, as the Dollar fell yet again on the currency markets.

Euro investors saw gold reach a 3-week high at €695 per ounce, while the single currency broke new 2009 highs above $1.41.

UK investors saw the Gold Price in Sterling touch £606 an ounce - the best level in eight trading sessions - as the Pound reached and breached a 6-month high at $1.61.

The "commodity currencies" of Australia and Canada also surged vs. the Dollar, leaving gold little changed from last week's closing price.

Government bond prices gained, pushing yields lower, while world stock markets rose sharply, with London's FTSE100 rising 1.8% for the week.

The German Dax added 1.3% on Friday morning to near the 5,000 level lost in Oct. '08.

Crude oil broke above $65 per barrel, base metals rose on a sharp jump in Japan's industrial output, and emerging-market bonds were on track for their best 3-month performance since 2002 as the New York opening approached.

Data from Merrill Lynch, quoted by Bloomberg, today showed Argentine debt climbing 28% this month alone, while Ukraine debt added 17%.

Behind the current rally, however, "The magnitude of the [debt] crisis in Central and Eastern Europe is hard to exaggerate," says Institutional Investor magazine.

"Banks in the region will need to refinance more than $130 billion in debt this year...Compounding the problem, half or more of all bank debt in key markets like Hungary, Romania and Ukraine is denominated in Euros, Swiss Francs or Dollars, and the real cost of servicing it has soared as local currencies have plunged."

Meantime in Beijing, China, US Treasury secretary Tim Geithner will begin talks this weekend aimed at "laying the foundation for balanced, sustained growth in the future," according to source quoted by Reuters.

"For China, this involves stronger domestic demand growth, shifting the structure of the domestic economy to serve domestic demand...It's important in bringing these shifts about to have a flexible exchange rate that the Chinese have committed to move toward."

The Gold Price in Yuan pushed higher again early Friday, after closing in Shanghai back above CNY200 per gram ahead of Thursday's "Dragon Boat" holiday.

Across in Vietnam - the sixth largest gold buying nation worldwide - the Gold Association this month asked the government to remove last spring's ban on gold imports after domestic prices jumped far above international Spot Gold rates.

"The government should allow gold imports again to stabilise the domestic market," says Nguyen Thanh Truc. "A normal market needs to include both import and export activities."

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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